Limited fiscal space will curtail support as Philippines economy slows

A cautious 2023 budget amid the need to stabilize Philippines’ government finances post pandemic means that fiscal policy won’t be able to counter restrictive monetary policy in supporting a slowing economy this year. Lack of policy support is a key reason for our below-consensus GDP growth 2023 forecast of 4.1%.

What you will learn:

• The Philippines economy is set to slow substantially in the coming quarters due to global headwinds. Elevated inflation means policymakers will not be able to react by lowering interest rates. Indeed, we expect tightening to continue for at least the next two meetings, albeit at a slower pace – in contrast to other Asian central banks who can afford to pause.
• Ideally, fiscal policy would take over the burden of supporting growth. But debt accumulated during the pandemic era means the focus is instead on fiscal consolidation.
• The initial FY2023 budget, as signed by President Marcos Jr. in December 2022, focuses the fiscal adjustment on historically low expenditure increases. Spending in FY2023 is planned to increase by just 4.9% over FY2022, compared to a 10.8% annual increase over the preceding decade.